Investor allocations to private debt to continue climbing over 2018

Over a third (36%) of professional investors plan to increase their allocation to private debt in the next 12 months, according to a new study commissioned in Q4 2017 by Intertrust, a leading global provider of high-value trust, corporate and fund services.

Of these, one in five (19%) said their allocation would increase significantly as many of the factors driving the growth of this asset class continue to remain largely in place over 2018 and beyond.  Assets under management in private debt funds have increased fourfold over the last decade to $595 billion by the end of 2016 and could reach $2.5 trillion in the next ten years.

According to the report, just 6% of investors said they would decrease their exposure to private debt and a further 31% plan to maintain it at the same level.

A key driver behind the success of private debt has been its performance; over a fifth of investors (22%) said that returns from the asset class had exceeded their expectations over the last three years, up from 15% in Intertrust’s 2016 private debt survey.  Only 9% of respondents think returns have fallen short.

Within the asset class, most investors (55%) cited direct lending as their most favoured strategy.  Direct lending funds account for 44% of all capital secured by private debt funds closed in Q3 2017, raising $10.1 billion, the largest of all fund types. Infrastructure debt (52%), real estate debt (45%) and credit-focused special situations (30%) were the second, third and fourth most favoured strategies among investors.

Despite the possibility of rising interest rates increasing the risk of large default events for private debt funds, investors remain sanguine with over three-quarters (79%) believing that the sector is resilient to rate rises.

Paul Lawrence, Global Head of Fund Services at Intertrust, said: “Investor appetite for private debt appears as strong as ever. Barring any unforeseen events, we can expect to see the most popular strategies such as direct lending attracting large volumes of capital particularly from pension funds and insurance companies seeking yield.

“Despite the optimism, the short-term fundamentals in private credit markets may be weakening.  Credit spreads are tightening and there’s evidence that investors are prepared to climb the risk curve without a corresponding increase in return expectations.”